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00:00I want to start with Janet Yellen speech this morning because she devoted about 22 of her 24 pages to a defense of the Fed's policies. And I look at things they could do in the future . She spent about two pages talking about the current economy and the fact that she believes the case for a rate rise has strengthened. Would you agree with her assessment and do you think that makes it more likely we'll see something soon. I saw a little more change that she's expressing is that the case has gotten a little stronger for a rate increase. I sort of read that from and I know the bill been talking about. I see it. I saw a little bit of the beginning. She made a point of at the beginning I'm going to talk about this before we talk about the long run thing. So I think there is a message there. Well they've brought unemployment down to perhaps its terminal rate about as low as it can go. And yet they haven't been able to move inflation to the PCC. Headline number which is their target is still at nine tenths of a percent. So is the case really there for a rate increase. I think it is because just because you have the inflation rate below the target doesn't mean you have to foot on the accelerator as they still do. You could certainly begin this movement toward normalization which I think she's indicated they should be doing even with the inflation rate and where it is at this point. Now I think I think many members of the FOMC realize that she devoted a considerable amount of time to the uncertainties facing the Fed and their inability to really know not only what's going on in the economy but what's going on in the bond market that makes it hard I guess to assess where the proper setting for policy should be. She did did emphasize uncertainty but near the end she went through it very carefully. Sort of the analytics of how policy will work in the future if rates are low it's going to be a little different to use QE more use forward guidance more. I thought that was laid out very carefully and it's sort of at the end she emphasized the uncertainty which of course there is. It's good to emphasize that. Well she did bring up your famous rule the Taylor Rule as she talked about the ways you assess the economy in the right possible policy prescription . The Taylor rule contains a comparison between the potential growth rate and where we are actually O'Connor's law. The the the difference between the two. Nowadays though can you say that the rule holds if you don't really know what potential growth is and there seems to be a great debate about how fast the economy can grow right now. There's always been discussions about that and I think there's not much the way that the economy as you say unemployment is is pretty close to what you thought you'd want in a normal circumstance. The real debate now is this so-called equilibrium real interest rate. When she talked about being 3 percent used to be 4 percent just a couple of years ago and maybe some people think it's low. I think that's the real issue. That was the focus of our time and many people are thinking about what do you think about it these days. Where would you put it. I think I think it's pretty. Quite frankly I think the evidence that we have that it's coming down is partly a result of the policies that central bankers have been following themselves of very low interest rates even negative interest rates. That tends to drive rates down below what they otherwise would be. So I'm not ready to just go down and say that it's no longer 4 percent it's 3 percent or even lower than 2 percent. Well at this point we have approximately roughly 2 percent growth one and a half to 2 percent growth the added 1 percent inflation you're still not quite at 3 percent you know when you ask about the Taylor rule when the hotel rule was first proposed for central bankers and it took years when you and I were young. Yeah get back longer longer Grand Teton was still here but that was when growth was still low to two point two percent was kind of the growth rate. So in a way we're we're back to that. Hope we get out of it fast because it's terrible to have these low growth rates but doesn't really change the nature of those kinds of rules by much and she's discussed the way in which it does change it. I think it's a good discussion . What do you make of her argument is based on the paper by David Westin either from the Fed board in recent days that suggests that they can still cut rates enough to stimulate the economy in a downturn even as low as they are because many of the previous downturns started with the Fed excessively tight . She made that point she also emphasized that they're not at a normal rate now. They were at a normal rate or even higher than normal then it would be easier to have a larger rate cut. So I think the situation now with a 50 basis point funds rate does make it a little harder and they ought to be thinking about that . It's one of the reasons I think getting back to normal would be good. So you're ready to make these adjustments when have you to. One of the questions she raised is where do we go from here and how do we lower rates if we need to in the future . Taylor Rule would suggest a Fed funds rate much lower than the policy rate has been. How do you get there. The Fed doesn't seem to like the idea of negative rates. I think they should be cautious about there's going to be discussion at this conference . But you know the success of negative rates in Japan is really questionable at this point. I think they're thinking about it . So they should be careful about that. There's all sorts of microeconomic things to go into the markets when you do negative rates. It doesn't pass through as much we talk about that at this conference already. So I think it's right. She laid out how you do it without negative rates and that said the future policymakers will be thinking about negative rates .

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John Taylor on Fed Policy, Taylor Rule

Stanford University Professor of Economics John Taylor weighs in on Fed Chair Janet Yellen's speech and discusses the Taylor rule from the Kansas City Fed's Economic Symposium in Jackson Hole, Wyoming. He speaks with Michael McKee on "Bloomberg Markets." (Source: Bloomberg)

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